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Will Charter's Modem Policy Cost Time Warner Cable Customers?

The merger between the two giants could have an unintended negative consequence for some subscribers.

Charter Communications'(NASDAQ:CHTR) attempt to acquire Time Warner Cable (NYSE:TWC) for almost $57 billion has not met the same public outrage as Comcast's(NASDAQ:CMCSA) failed effort to do the same.

That's largely because consumers do not have the same negative image of Charter as they do of Comcast. It's not that consumers like either company, but Charter at least scores an industry average of 63 on the 2015 American Consumer Satisfaction Index report for subscription television; Comcast comes in at a dismal 54. Charter and Comcast also rank below average on the same report as Internet service providers, coming in last and tied for next-to-last, respectively.

None of these numbers is good. Being average or below-average in a hated industry isn't the same as being liked. Charter, however, has attracted only the passive consumer dislike associated with its industry. Comcast has earned a more active consumer disdain partly due to the many public scandals it has endured over pricing, people being harassed when they try to cancel service, and shady/questionable billing practices.

It seems like a subtle distinction, but it isn't. Comcast has, through its customer service and monopolistic pricing policies, earned active enmity from the Federal Communications Commission, which almost certainly led to the FCC denying its TWC bid. Charter, at least for now, only has vague category dislike -- similar to the way people would broadly dislike the idea of lawyers, but not their lawyer specifically.

As it awaits FCC approval, it is very important the company avoid doing anything to create the appearance that it's just another Comcast. And now an issue involving modems has surfaced.

A cause for concernOne of the challenges of negotiating any merger is how the new, larger company handles its policy differences. In the case of Time Warner Cable and Charter, there is a fairly major difference in how they charge for cable modems that has one modem manufacturer asking the FCC to deny the deal, The Los Angeles Times reported.

The potential problem comes from the fact the Time Warner customers can either rent their modem from the company for $8 a month, or purchase one and not pay that fee. That is a standard policy for the industry, which generally does not publicize the purchase option (because collecting monthly fees is a nice source of profit) but does allow it.

Charter, however, does things differently. It does not charge a modem rental fee directly, instead rolling the cost into what consumers pay each month. The company does not stop people from buying their own modems, but those users do not pay less if they do.

This means, in theory, that Time Warner Cable customers who shelled out the $99 or so a cable modem costs might be out of luck after the merger.

Cable modems can in most cases be leased or purchased. Image source: zoomtel.com.

That's at least partly why Zoom Telephonics, a maker of modems, has asked the FCC to kill the deal, the paper reported.

"The Communications Act says that cable companies should sell cable modem leases and Internet service separately," Andrew Jay Schwartzman, a professor at Georgetown University Law Center who is representing the modem company, told The Times. "By combining the prices, Charter's customers are deprived of the ability to purchase advanced cable modems and save the cost of monthly rental fees," he said.

Charter fires backAt first glance, this does seem like a cause for concern, and the idea that Charter rolls an essentially optional fee into its pricing feels like a familiar old cable industry type of move. However, the company insisted in an email exchange with The Motley Fool that it was actually doing something to benefit its customers.

That on its own sounds a bit like when coffee places try to justify not putting the milk and sugar in for you by saying that you can make it just the way you like it, but it rings more true when you consider how Venech closed his email.

"In addition, if a current TWC or BHN customer likes the specific package that they are in today, they can continue with the same package after the Charter transactions close," he wrote. (Charter is also buying Bright House Networks in a separate transaction that also required FCC approval.) Charter told the Los Angeles Times it expects most customers to switch to its plans to take advantage of faster speeds and better pricing.

It's not bad for big cableHowever Charter frames things, it is charging for cable modems even if it builds the cost into its overall price for Internet service. This should anger its customers, who should demand the option of buying their own modem at a lower price.

That said, there have been no major reports of Charter subscribers demanding this or being angry at the current pricing. I don't know whether that is because of ignorance or genuine satisfaction.

TWC customers who bought a modem, on the other hand, had reason to be wary (even if it is a modem manufacturer with obvious self-interest expressing that concern). Charter, however, has properly answered those concerns by offering to let customers keep their current packages.

If Charter formally makes this pledge to the FCC, then TWC customers have nothing to worry about in terms of their modems. Long term, it's hard to imagine Charter won't want unified pricing, but if Time Warner Cable customers get an initial choice, they should at least be able to recoup the money they laid out buying a modem before succumbing to a Charter plan.

By considering the complaint and addressing it quickly (and at least somewhat in a pro-consumer fashion), Charter showed that it's not Comcast. That should please the FCC as it considers the deal.

Daniel Kline has no position in any stocks mentioned. He had an argument with his mother over Thanksgiving about her buying her modem. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Daniel B. Kline is an accomplished writer and editor who has worked for Microsoft on its Finance app and The Boston Globe, where he wrote for the paper and ran the Boston.com business desk. His latest book, "Worst Ideas Ever," (Skyhorse) can be purchased at bookstores everywhere.
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